• 20 Mar 2012 at 12:49 PM

Today In People Who Don’t Need Your Capital

I’ve sort of resisted writing about Apple’s capital return thingy because, yeah, that basically makes sense, they have more money than they know what to do with and more coming in each day, so their choices are pretty much (1) give some of it back, (2) find something super-awesome to spend it on, (3) find something dumb to spend it on, or (4) engage in weird experiments in macroeconomics and/or exponential growth where they end up having more money than there is in the world. I don’t have any super-awesome ideas to spend it on (and also I trust Apple to know better than I do what it’s good at doing); spending it on dumb things seems … dumb; and I don’t think the weird experiments will work though you never know! That leaves “give some of it back.” So you can say something like “yeah this makes sense” or “I would’ve done it slightly differently,” or you can go and say something silly. Like:

Gregory Milano of Fortuna Advisors, which advises Fortune 500 companies on maximizing their market value, did some quick math. Milano considers buybacks to be like any other investment a company can make. Buybacks must offer a good return in order to be deemed a smart use of capital. That is, if a company buys its stock at $10 a share and it rises to $12 next year, it’s earned a 20% “return on investment” for shareholders. Because the average business’s capital costs run 10% a year, between debt and equity expenses, most companies should seek buybacks to return more than 10% a year if they want to build shareholder profit.

In Apple’s case, returns on capital are extraordinary. The tech giant earns around a 40% return on its operating capital, far exceeding its capital costs. So what’s a good hurdle rate, or minimum rate of return, for its buyback? Milano thinks a 20% “return on investment” is fair.

For the buybacks to deliver that return, Milano says Apple’s stock price will have to rise 128% to $1,368 over the next five years. For a meager 10% buyback return, the stock needs to hit $984 in five years.

Can the stock reach those heights?

You make the call! I will not be making that call because feh. Here is my model of Apple:

(1) People entrust it with money to build stuff
(2) If it can build stuff at a 40% IRR, it should go do that
(3) If it can build stuff at a 39% IRR, it should probably go do that

(4 – 40) If it can build stuff at an X% IRR, 39>X>1, dealer’s choice

(41) If it can put money into bank accounts at a 1% IRR, it should probably give that money back to shareholders who can, y’know, also put it in the bank at 1%, or do something else.

You can interpret the present situation in various ways but you’d have to at least consider the possibility that, loosely speaking, Apple has captured the projects where risk-adjusted X > 1%, and is kind of out of ideas that are better than parking its cash in the bank. Because otherwise it would be doing those ideas instead of parking its cash in the bank.* Part of why Apple’s returns on capital are extraordinary is because it invests its money in really good projects. If it doesn’t have any more of those, it makes sense to give some of the money back. In other words, your hurdle rate in deciding whether to return capital can’t be your cost of capital. (Right?)

But you can’t really blame Mr. Milano of “Fortuna Advisors, which advises Fortune 500 companies on maximizing their market values,” because holy shit he advises Fortune 500 companies on maximizing their market values!** How could that be a goal? And the answer is, you know how: managers like to have high market values. One way to reduce your market value would be to give cash back, though I have a feeling it won’t work here.

Meanwhile in another part of town a man did not attend a meeting:

Facebook Inc. chief executive Mark Zuckerberg doesn’t expect to play a hands-on role selling the social network’s initial public offering to analysts, one Facebook executive told Wall Street analysts Monday.

The company is also planning to pay a below average fee to underwriters of the stock sale.

On Monday, Mr. Zuckerberg skipped a meeting of analysts and bankers at Facebook’s Menlo Park, Calif., headquarters, according to people familiar with the meeting. In response to a question about his absence, the company’s chief financial officer, David Ebersman, said Mr. Zuckerberg preferred to focus his time on developing the service rather than play a role with such analysts, the people said.

Senior Facebook executives, however, haven’t made any decisions yet on the role Mr. Zuckerberg will play in a so-called roadshow to sell the company’s shares to investors, or the larger IPO process, said one person familiar with the matter.

Obviously the stronger move here would be to attend the meeting, but stare out the window the whole time and comment on the weather, and then some snotty analyst would be all “Mr. Zuckerberg, do I have your full attention?” and YOU KNOW THE REST. But this sends the same message I think which is “this process has the minimum amount of my attention.***”

Which makes sense. Facebook doesn’t need the money from its IPO, except hilariously to pay taxes incurred by its IPO, and it’s actually borrowing money to do that. (Presumably because L+100 money is cheaper than expected returns on Facebook stock.)

You can see why this sort of thing gets people mad. The notion that companies are supposed to be run for the benefit of shareholders, which I guess makes sense as a first approximation, sometimes grows into the less sensible notion that the most important thing for a CEO to do is to think thoughts about his shareholders. Apple and Facebook have the luxury of mostly not having to play to that perception – Apple because it’s the biggest company in the galaxy and also because it’s ridiculously profitable so shareholders are happy even without a lot of touching and stroking, Facebook because Facebook Facebook Facebook Facebook and also because it doesn’t really want their money. So they wind up treating their capital like they’d treat other inputs to their enterprise: using only as much as they need, returning what’s not being used, and delegating its management to specialized executives rather than making it the main focus of their CEO’s time. It all makes total sense if you’re not too romantic about the role of shareholders. It just doesn’t do much for market-value consultants and capital markets bankers.

Can Apple’s stock reach $1,368? [Fortune]
Facebook’s Zuckerberg Skips Analyst Meeting [WSJ]

* I mean, really loosely speaking. Not really 1%. But it’s probably safe to say that all the guaranteed 20% IRR projects are budgeted for in the four hundred kajillion dollars they’re hanging on to.

** He probably doesn’t really. To be fair, Fortuna’s principles seem a bit more plausible than that, although also confessedly “postmodern,” which, okay. But presumably he’s about shareholder value maximization, not like literally “how to increase market cap.”

Also, I’m generally being unfair to him. He’s probably discussing buybacks as opposed to dividends, not buybacks as opposed to keeping the cash, and there the argument is better though not necessarily a slam-dunk. I’m more in the price-insensitive school of buybacks myself but the other side has its points. So, sorry Mr. Milano. I was just tickled by that specific number. Will they make $1,368? Will they not? The suspense will kill me for five years.

*** “And, incidentally, of my fees.”

80 comments (hidden to protect delicate sensibilities)
Show all comments ↓

Comments (80)

  1. Posted by Steve | March 20, 2012 at 1:09 PM

    "Because the average business’s capital costs run 10% a year"

    We ain't RIM motherfucker.

  2. Posted by DingALing | March 20, 2012 at 1:17 PM

    I wish they'd man the fuck up and say why Zuck really missed the meaning: He doesn't understand how to run a business and leaves it to the CFO so he can go back to playing Farmville.

  3. Posted by Cubes | March 20, 2012 at 1:17 PM

    I may have chuckled at a Matt post. Someone's learning the ropes.

  4. Posted by Guest | March 20, 2012 at 1:20 PM

    What's the appeal of prison shoes?

    – Guy who has never been to prison but watches a lot of Cops

  5. Posted by Im_a_Dude | March 20, 2012 at 1:25 PM

    didnt read the post, but love those Adidas slides!

  6. Posted by Guest | March 20, 2012 at 1:27 PM

    At Ford in the 1950's they used to pay their employees a good wage and give them discounts on Ford cars. Thought was: folks who worked on cars all day would be more likely to plow excess dough back into the cars and they'd want buy the newer models more often.

    – Guy who doesn't really get corporate finance but likes a good story

  7. Posted by Guest | March 20, 2012 at 1:32 PM

    I don't get it. If I'm the CEO I'm not sitting on the floor. That plebe in the back of the photo is.

  8. Posted by Rut-roh | March 20, 2012 at 1:36 PM

    Never a good sign when Matt is the first post of the day

  9. Posted by 4444444444444 | March 20, 2012 at 1:38 PM

    Naa bro, that's not how kids think in 2012. Didn't you see 21 Jump Street? Nobody 1-straps it anymore either.

  10. Posted by Guest | March 20, 2012 at 1:39 PM

    He doesn't understand how to run a business? How much are you worth, chief? Boom, roasted.

  11. Posted by Henry Ford I | March 20, 2012 at 1:44 PM

    For really good stories, check out my newspaper, The Dearborn Independent.

  12. Posted by Avid Reader | March 20, 2012 at 1:47 PM

    Not related to Matt, but I do think he may be the most incisive financial blogger out there! Once you get past his various ethical blind spots, of course…Oh, and his, like, affected writing style.

    Anyway, good stuff as always!

  13. Posted by pazzo83 | March 20, 2012 at 1:50 PM

    I know right??

    – Paris Hilton

  14. Posted by guest | March 20, 2012 at 1:54 PM

    I'd buy all my H1's hookers.

  15. Posted by john ferraiuolo | March 20, 2012 at 2:24 PM

    If you want to bet on the NCAA, please contact Chris Armada @ 646-556-2785 – Solid bookmaking for 10+ years – BofA employee with solid backing. Reports to John Ferraiuolo – Barclays management – solid backing as well.

  16. Posted by Huésped | March 20, 2012 at 2:32 PM

    I never thought I would agree wholeheartedly with Matt. Do people who actually get paid in this industry understand that Apple isn't desperate for the capital to fund the next four iPad-quality products, or understand the idea of marginal returns?

  17. Posted by Marry Brown | March 20, 2012 at 2:35 PM

    <img src=http://www.insurancelowrate.com/products/images/7.LoL.jpg>I think he's good luck, of course, there are certain strength<img src=http://www.insurancelowrate.com/products/images/6.LoL.jpg>

  18. Posted by Texashedge | March 20, 2012 at 3:09 PM
  19. Posted by PermaGuestII | March 20, 2012 at 3:37 PM

    There are people in this industry who thought writing an infinite amount of credit default swaps on CDO^2 deals made sense.

  20. Posted by Guest | March 20, 2012 at 3:42 PM

    Why doesn't Apple repatriate and pay taxes on all this money? Greed I guess is the only explanation. It is surely not for business reasons.

  21. Posted by AIG Quant | March 20, 2012 at 3:45 PM


  22. Posted by noticed that | March 20, 2012 at 3:49 PM

    they're more concise.

  23. Posted by Guest | March 20, 2012 at 3:53 PM

    That plebe in the back of the photo has a present net worth of $325 mil.

  24. Posted by The Sword | March 20, 2012 at 3:55 PM

    Matt "Fucking Tolstoi" Levine……..can we get your articles in the abridged format where you actually just write enough to get the point across????!!!! Jesus! I'm tired of reading a novel to get a short one-pager worth of enjoyment…..

  25. Posted by Nose to Ass | March 20, 2012 at 3:57 PM

    Shut up.

  26. Posted by Avid Reader | March 20, 2012 at 4:09 PM


  27. Posted by pazzo83 | March 20, 2012 at 4:32 PM

    Good point, companies never try to reduce their tax exposure (i.e. more money vs less money) for business reasons.

  28. Posted by Guest | March 20, 2012 at 4:40 PM

    Hey, nice use of sarcasm.

  29. Posted by Matt's Shrew | March 20, 2012 at 4:47 PM

    Matt, you fucking two-timing bastard! Who is this "Tolstoi" you're fucking? Is she that Russian bitch you said was just a friend from your creative writing class? You ASShole! I never wanna speak to you again! You and that bitch can go fuck yourselves!

  30. Posted by Anon | March 20, 2012 at 5:35 PM

    Um, what? The share buyback is offsetting dilution due to employee stock options. This isn't a buyback, as much as it is a glorified salary expense. The whole practice of a buyback is horrible for shareholders… The best time to buyback shares is when a company's stock price is low, but how many distressed companies have cash hoards to afford the buybacks AND right the ship from an operating perspective? In practice, share buybacks are always authorized when the company has plenty of cash on its balance sheet and its stock price is high because it's operating effectively.

    It's always justified as "offsetting dilution" which is just saying "we're locking in the cost of these options at the worst possible time." Return the cash to shareholders and let them determine the efficient way to allocate their capital; if we think it should be reinvested in the company, we'll have no problem buying more shares.

    In conclusion, fuck "market capitalization consultants."

  31. Posted by Guest | March 20, 2012 at 9:47 PM

    Matt? You know you already wrote this article, right?

  32. Posted by guest | March 20, 2012 at 10:01 PM

    No, Matt said he's in the price insensitive school, which is fucking stupid.

  33. Posted by hmmmm | March 20, 2012 at 11:08 PM

    Wow, one of the best articles I've read on here. Well done, Matt. I'm proud.

  34. Posted by UFO | March 21, 2012 at 7:52 AM

    So let me simplify:

    Zuck basically has almost zero actual need for financing because he's got a highly profitable cash business and this frustrates bankers.

    Is that about right?

  35. Posted by Damien Finkelstein | September 8, 2012 at 11:41 PM

    Adoro me mostrar peladinha na internet cam

  36. Posted by WoW Gold dupe | September 10, 2012 at 7:16 PM

    This domain is fabulous. I have read every post almost so far. I cant believe how delicious your writing actually are. I would like to meet with you. Please contact me when you can. Much praise

  37. Posted by Learn More | September 12, 2012 at 5:53 AM

    I really enjoyed your article. That is nice when you read something that is not only informative but entertaining. Outstanding.

  38. Posted by Ashley Humphery | September 14, 2012 at 3:40 PM

    A person necessarily lend a hand to make seriously articles I’d state. That’s the incredibly first time I frequented your online page and thus far? I amazed with the research you made to make this actual post extraordinary. Excellent activity!

  39. Posted by Ferdinand Bourbeau | September 14, 2012 at 4:53 PM

    You actually concluded a variety of fine points here. I performed a search on the issue and found that nearly all people have the same opinion with your blog.

  40. Posted by scrabble words finder | September 16, 2012 at 7:39 PM

    Hi there! Do you know if they make any plugins to assist with SEO? I’m trying to get my blog to rank for some targeted keywords but I’m not seeing very good gains. If you know of any please share. Cheers!

  41. Posted by alcohol test strips | September 17, 2012 at 8:20 PM

    Hello! Quick question that’s entirely off topic. Do you know how to make your site mobile friendly? My site looks weird when viewing from my apple iphone. I’m trying to find a template or plugin that might be able to resolve this issue. If you have any suggestions, please share. Appreciate it!

  42. Posted by more info | September 17, 2012 at 11:43 PM

    The very core of your writing whilst sounding agreeable in the beginning, did not sit properly with me after some time. Someplace throughout the sentences you actually were able to make me a believer but just for a very short while. I however have got a problem with your jumps in assumptions and you might do well to help fill in those gaps. In the event that you can accomplish that, I could definitely be amazed.

  43. Posted by free relationship advice | September 18, 2012 at 3:59 AM

    Do you mind if I quote a few of your articles as long as I provide credit and sources back to your website? My blog site is in the very same niche as yours and my visitors would truly benefit from a lot of the information you provide here. Please let me know if this okay with you. Appreciate it!

  44. Posted by ticks control | September 18, 2012 at 5:52 AM

    Nice post here, thought I could learn more from but I can learn more from here.

  45. Posted by over here | September 18, 2012 at 8:06 AM

    Please let me know if you’re looking for a author for your blog. You have some really good posts and I believe I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some content for your blog in exchange for a link back to mine. Please blast me an email if interested. Regards!

  46. Posted by bing entertainment | September 18, 2012 at 11:11 AM

    My coder is trying to convince me to move to .net from PHP. I have always disliked the idea because of the expenses. But he’s tryiong none the less. I’ve been using WordPress on a number of websites for about a year and am nervous about switching to another platform. I have heard excellent things about blogengine.net. Is there a way I can import all my wordpress posts into it? Any kind of help would be greatly appreciated!

  47. Posted by property clearance glasgow | September 18, 2012 at 3:38 PM

    Hola! I’ve been following your web site for a long time now and finally got the courage to go ahead and give you a shout out from Porter Tx! Just wanted to mention keep up the good work!

  48. Posted by how to unlock iphone 2g | September 19, 2012 at 2:25 AM

    Hello! I’ve been following your site for some time now and finally got the bravery to go ahead and give you a shout out from Dallas Tx! Just wanted to mention keep up the fantastic work!

  49. Posted by Bryan Vanstone | September 19, 2012 at 4:38 AM

    This can be such a good web-site that genuinely cought my focus at when. I genuinely like the content material but additionally the all round design. The owner has to be a accurate talent when it comes to constructing websites.

  50. Posted by Roslyn Angustia | September 20, 2012 at 9:00 AM

    There is noticeably a bundle to learn about this. I suppose you made certain nice points in features also.

  51. Posted by harrah's casino | September 20, 2012 at 7:48 PM

    Almost all news flash consumers these kinds of engages …. matter who essential there one can find somewhat published post on the warm theme, not even the full slurry growing media. Stick with it!

  52. Posted by Lemuel Bekhit | September 21, 2012 at 1:26 AM

    But a smiling visitor here to share the love (:, btw outstanding describe. “Competition is a painful machine, on the contrary it produces vast results.” by Jerry Flint.

  53. Posted by click here | September 21, 2012 at 11:50 AM

    Good Afternoon to every. My Group Is by Greece and employ a newer web page. Take A Look At my business site and tell me your advice. Yow Will Discover many good ideas and knowledge about my work. It’s no cost of charge 100% and without having registrator. With Thanks To every single who’ll see my new websites. This Will Aid my work. | πόρτες |

  54. Posted by Indyjski film | September 21, 2012 at 8:14 PM

    of course like your website but you need to test the spelling on several of your posts. Several of them are rife with spelling problems and I to find it very bothersome to inform the reality then again I’ll surely come again again.

  55. Posted by Rochel Giacomini | September 22, 2012 at 11:35 AM

    I don’t commonly comment but I gotta state regards for the post on this amazing one :D.

  56. Posted by Jaquelyn Freyman | September 25, 2012 at 12:17 AM

    Hiya, I am really glad I’ve found this information. Nowadays bloggers publish only about gossips and internet and this is actually irritating. A good site with interesting content, this is what I need. Thanks for keeping this web-site, I’ll be visiting it. Do you do newsletters? Can not find it.

  57. Posted by Cher Nitzel | September 27, 2012 at 6:07 AM

    My wife and i have been absolutely thrilled Ervin could finish off his inquiry by way of the ideas he gained through the web pages. It is now and again perplexing to simply always be releasing hints that people today have been selling. And we fully understand we now have the writer to be grateful to for that. The type of explanations you made, the simple web site navigation, the relationships you help create – it’s mostly wonderful, and it is making our son and our family recognize that that subject matter is interesting, which is especially mandatory. Thanks for all the pieces!

  58. Posted by offshore investment fund | September 27, 2012 at 10:03 AM

    Very good written post. It will be beneficial to everyone who utilizes it, including yours truly :). Keep doing what you are doing – for sure i will check out more posts.

  59. Posted by Tod Polisky | September 27, 2012 at 2:07 PM

    Superior Early morning, I just stopped in to visit your web site and assumed I’d say I experienced myself.

  60. Posted by Nelida Alukonis | September 29, 2012 at 7:48 AM

    Hey! Do you know if they make any plugins to assist with SEO? I’m trying to get my blog to rank for some targeted keywords but I’m not seeing very good results. If you know of any please share. Many thanks!

  61. Posted by cox phone Gilbert | October 2, 2012 at 1:30 AM

    Way too poor the Joint Commission International hospitals were being not included on this report!

  62. Posted by Jaime Lashbrook | October 2, 2012 at 3:53 PM

    Hi, I think your blog might be having browser compatibility issues. When I look at your blog site in Safari, it looks fine but when opening in Internet Explorer, it has some overlapping. I just wanted to give you a quick heads up! Other then that, great blog!

  63. Posted by Omer Lichte | October 3, 2012 at 9:24 AM

    This car just landed on Popular Meachanic’s record on the Ten Wimpiest Muscle Cars Ever. This is certainly what they wrote:

  64. Posted by Rodger Halyk | October 4, 2012 at 11:50 PM

    i have the identical car, s line model. just had it mapped. serious torque mid range…

  65. Posted by Magen Carlye | October 5, 2012 at 3:51 AM

    I do think Monty Python was driving this one particular.

  66. Posted by purchase twitter followers | October 5, 2012 at 10:07 AM

    Usually I do not read post on blogs, however I would like to say that this write-up very forced me to take a look at and do so! Your writing style has been surprised me. Thanks, quite great post.

  67. Posted by cable tv Mesa | October 7, 2012 at 2:24 AM

    I truly appreciate this post. I’ve been seeking everywhere for this! Thank God I discovered it on Google. You have got built my day! Thx once again…

  68. Posted by high speed internet Chandler | October 7, 2012 at 9:37 AM

    So, you will be lunching in Mansfield within the 30th (if I counted proper)? If I needed to drive up and meet you, how would I now where by to go?

  69. Posted by fast internet Tempe | October 7, 2012 at 11:07 PM

    Romney must not talk to stephanopolis. That dude is in enjoy with 0bama, literally! when he interviews him he blushes._Romney needs to get tough and not move down. He had a presidential moment, when he allow 0bama have it right after the killing in the Ambassedor. Dont permit up on that..

  70. Posted by Madmily | October 8, 2012 at 12:40 PM

    Wow, Thank you for this blog. Thats all I will say. You certainly have made this website into a thing thats eyesight opening and important. You plainly know a lot about the niche, youve covered numerous bases. Great stuff because of this part of the internet. Again, thank you just for this blog.

  71. Posted by cable and internet Scottsdale | October 10, 2012 at 10:37 AM

    I do not have any most favorite cards, but I do have most favored people! My faves are Ken Caminiti, Tony Gywnn, Joe Montana, Jerry Rice, Junior Seau, and LaDainian Tomilinson. That is quite a lot all I am able to consider of for now.

  72. Posted by suplementy | October 11, 2012 at 6:55 AM

    I desired to be able to thank you for actually carrying out, intended for jogging this site. I prefer it often whenever understanding how to study, simply because innumerable other inspected by simply me personally are really biased. On account of you actually by some means have the ability to my family to travel university; )

  73. Posted by Nowe polskie filmy | October 11, 2012 at 10:05 AM

    Thanks , I have immediately been probing for information approximately this topic for a long epoch and yours is the supreme I have came ahead accordingly a long way. Then again, what in regards to the bottom line? Are you positive regarding the source?

  74. Posted by Link | October 11, 2012 at 9:00 PM

    I simply needed to appreciate you once again. I am not sure the things that I would have carried out in the absence of the suggestions provided by you relating to this industry. It seemed to be a horrifying dilemma for me personally, but finding out a new specialized strategy you processed it forced me to cry over happiness. I will be thankful for your service and then wish you find out what a great job that you are undertaking training many people via your site. I am sure you have never got to know any of us. Find Out More

  75. Posted by Ambrose Wendler | October 12, 2012 at 3:08 PM

    - yo , Thank you a whole lot for generating this website . I m into gambling niche and have identified this website utilizing search on google . Is going to be certain to share . I’m affiliate and have identified your site extremely informational Many thanks , see ya. :S

  76. Posted by Corene Cacciotti | October 14, 2012 at 4:53 PM

    My goodness. For someone who actually enjoys listening to both sides of a story, this string of comments made me feel physically ill. Although I may continue to visit this site for information, I will probably skip the comments from now on. In fact, I wouldnt be surprised to be compared to some despicable historical figure or be called terrorist-loving simply for stating my opinion.

  77. Posted by Janyce Halajian | October 14, 2012 at 5:37 PM

    I seem to be the only one noticing that despite problems with the OC, OL, playcalling etc, the run game and Steelers O in general has been perfectly productive with MM in the backfield.

  78. Posted by solar panels | October 16, 2012 at 7:05 PM

    Hands down, Apple’s app store wins by a mile. It’s a huge selection of all sorts of apps vs a rather sad selection of a handful for Zune. Microsoft has plans, especially in the realm of games, but I’m not sure I’d want to bet on the future if this aspect is important to you. The iPod is a much better choice in that case.

  79. Posted by Site 1001bonnesaffaires.com | October 16, 2012 at 7:18 PM

    This is my first time I have visited here. I found a lot of interesting information in your blog. I guess I am not the only one who noticed this! keep up the impressive work. :p

  80. Posted by Intraday Tips | April 29, 2013 at 1:56 AM

    buybacks depend on the no. of share the shareholders holding , would they get returns on per share basis or is there any other scheme for buyback .